A potential disaster averted, stocks may romp ahead

Commentary: Expectations are high as financial challenges loom

V.Phani Kumar

HONG KONG (MarketWatch) -- Whispers of relieved sighs, drowned over the weekend by the noise of drumbeats and firecrackers, will likely resonate when the markets open for trading this week in India.

The Congress Party-led United Progressive Alliance's better-than-expected performance in the nation's marathon general elections has brought it closer to the required majority in Parliament, again shaming the pollsters who had predicted significantly fewer seats for the ruling coalition. But few will be complaining.

A potentially disastrous outcome has been averted, and that's all that matters for now.

With just around 10 seats short of the required 272 members required in the lower house of the Parliament for an absolute majority, the UPA should have the required bargaining power to convince regional parties such as the Samajwadi Party or the Rashtriya Janata Dal to join the coalition, or lend outside support even if they choose not to be a part of the next government. It will be no small help to the Congress in those discussions that the party itself has secured more than 200 seats.

To be sure, the Congress will still have to make some concessions from time to time to appease its coalition partners, but that's a story for another day.

The important thing for now is that chances of a stable government have been bolstered, and the UPA may return to power without having to take support from the Communist parties, whose staunch opposition prevented several economic reforms from taking off in the UPA's previous term.

While Manmohan Singh, the preeminent economist-turned-politician, is all set to return as prime minister, it is reported that Palaniappan Chidambaram could remain home minister and economist Montek Singh Ahluwalia will probably be the next finance minister.

Thirty-eight-year-old Member of Parliament Rahul Gandhi -- whose father Rajiv Gandhi, grandmother Indira Gandhi and great grandfather Jawaharlal Nehru were all former prime ministers -- is also reportedly being "persuaded" to accept a Cabinet position.

The long-anticipated appointment, if it happens, will inevitably place him in line for the country's top political job in a few years. But it must be noted that the extension of the Nehru-Gandhi family-led rule in India has often been criticized, although it's supported staunchly by several members within the Congress Party.

As for investors, the two most important items on the wish list will likely be economic reforms and fiscal responsibility.

The new UPA government is expected to launch reforms such as the liberalization of the banking and insurance sectors, which it was forced to shelve in the previous term because of the Communist allies' stiff opposition.

Likewise, privatization of state-owned companies is also likely to be resumed. Prime Minister Singh, along with Ahluwalia and Chidambaram, are credited for setting India on the path of economic liberalization in the 1990s, and market expectations are bound to be high.

Managing the country's finances will be more challenging. The economic slowdown last year hurt tax revenue while expenditure remained high, and inflated the combined fiscal deficits of the federal and state governments to more than 10% of the country's gross domestic product.

Last week, Fitch Ratings issued a reminder, albeit a gentle one, that the deterioration in the fiscal position, if left unaddressed, could potentially result in a downgrade of India's sovereign creditworthiness. The ratings agency noted that the slippage increased India's debt-to-GDP ratio to a record high of 82%. The fiscal position has limited the government's ability to provide an economic stimulus at a difficult time.

The benchmark Sensex has risen for 10 straight weeks, notching gains of over 46% during the period. An 11th successive week of advance seems likely, as investors celebrate the prospect of a stable federal government, but the market's future course could well depend on how the new administration balances its actions under these restrictions.

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